Scheme to set artificially high ebook prices orchestrated by Steve Jobs

The US government’s price-fixing lawsuit against Apple goes to trial next month in New

York. Ahead of its court date, the US released emails that purport to show Apple was the

“ringleader” in a scheme to set artificially high ebook prices with some of the

largest American publishers, which have already settled the case.

The emails have mostly been viewed in the context of the lawsuit, but they also provide

an extraordinary view of high-stakes negotiation between the leaders of two powerful

firms, Apple and News Corp. They start far apart, but over the course of five days,

Apple’s then-CEO Steve Jobs successfully pulls the son of News Corp. CEO Rupert

Murdoch over to his side.

Jobs was a famously hard-nosed negotiator who won these kinds of battles all the time.

Before book publishers, there was the movie industry. And before that, music record

labels. But most of those negotiations were hidden from view. What follows are the

emails released last week along with some context; spelling and grammar have been

preserved from the originals.

* * *

News Corp.’s opening move

It was a Friday morning, January 22, 2010. Apple was preparing to release its newest

product, a long-rumored tablet computer, the following week. Part of the iPad’s appeal

was supposed to be the vast array of media that could be consumed on it, but one of the

largest American publishers, HarperCollins, was holding out from signing a deal to

sell its ebooks in Apple’s iTunes store.

Those were the stakes as Eddy Cue, Apple’s head of iTunes and the App Store, visited

executives of HarperCollins and its parent company, News Corp. The substance of that

meeting was conveyed in an email sent to Cue later that day by Brian Murray, the

CEO of HarperCollins. It detailed the publisher’s opening bid in the negotiation, with

five days remaining until the iPad’s unveiling.

Eddy,

Thanks for coming in again this morning. We’ve talked over the proposal and I want to

make sure that you have a summary of the deal that HarperCollins would be willing to

do in your timeframe.

1. Pricing: We need flexibility to price on a title by title basis outside the prescribed tiers

in the contract. We will use our best efforts to meet the tiers we discussed.

2. MFN ["most favored nation" status]: In the event that HarperCollins and Apple

disagree on a consumer price for a title, HarperCollins needs the ability to make that

title available through other agents who support the higher price.

3. Commissions: We need a lower commission on new releases for the economics to

work for us and our authors. We believe a 30% commission will lead to more authors

asking for ebooks to be delayed a result that will not work for Apple or HarperCollins.

4. The new release window: We need to have flexibility on the agency window. We

believe this window should be 6 months rather than 12 months in the event that one or

more large retailers do not move to an agency model.

Leslie will be sending Kevin a contract that reflects these points in the event you wish to

move forward on these terms.

Thanks

Brian

Those terms were never going to fly with Apple, which had successfully signed deals

with HarperCollins’s rivals, like Penguin (a division of Pearson) and Simon &

Schuster (part of CBS). Those deals would allow Apple and the publishers to set prices

for new ebooks at $12.99—three dollars higher than the typical rate at that time

on Amazon—and take a 30% cut of each sale.

But HarperCollins wanted the freedom to set its own prices and worried that $12.99 per

ebook would hurt its sales on the new iPad as well as the Kindle. It also didn’t want to

give up 30%. To back up its position, James Murdoch, a high-ranking News Corp.

executive, forwarded Murray’s email to Apple’s then-CEOSteve Jobs, and included the

following note. It was still Friday.

Steve,

Thanks for your call earlier today, and for the time last week.

I spoke to Brian Murray and Jon Miller [then the head of digital media at News Corp.]—

and Brian is sending a note to Eddy today. I thin I have a handle on this now. In short—

we we would like to be able to get something done with Apple—but there are legitimate

concerns.

The economics are simple enough. [Amazon] Kindle pays us a wholesale price of $13

and sells it for 9.99. An author gets $4.20 on the sale of a hardcover and $3.30 on the

sale of the e-book on the Kindle.

[A portion of this email was redacted by the court.]

Basically—the entire hypothetical benefit of a book without raw materials and

distribution cost accrues to Apple, not to the publisher or to the creator of the work.

The other big issue is one of holdbacks. If we can’t agree on the fair price for a book,

your team’s proposal restricts us from making that book available elsewhere, even at a

higher price. This is just a bridge too far for us.

Also, we are worried about setting prices to high—lots of ebooks are $9.99. A new

release window with a lower commission (say 10[%]) for the first six months would

enable us to proce much more kenly for Apple customers. We’d like to da that.

More on this below in Brian’s note to Eddy. We outline a deal we can do.

Feel free to call or write anytime over the weekend to discuss if you like.

I am in the UK (so eight hours ahead of CA). My home number is [redacted]. I check the

email regularly.

Steve, make no mistake that across the board (TV, Studios, Books, and Newspapers) we

would much rather be working with apple than not. But we, and our partners who

produce, write, edit, and otherwise make all this with us, have views on fair pricing, and

care a lot about our future flexibility. I hope we can figure out a way, if not now and in

time for this launch of yours, then maybe in the future.

Best,

JRM

Jobs digs in

Jobs wasn’t willing to compromise. He sent this reply to Murdoch the same day, arguing

that Amazon’s pricing wasn’t sustainable and would train people to think that ebooks

were cheap. Jobs also reminded Murdoch of Apple’s vast reach—”over 120 million

customers with credit cards on file.” You need us more than we need you, he seemed to

be saying.

James,

A few thoughts to consider (I’d appreciate it if we can keep this between you and me):

1. The current business model of companies like Amazon distributing ebooks below cost

or without making a reasonable profit isn’t sustainable for long. As ebooks become a

larger business, distributors will need to make at least a small profit, and you will want

this too so that they invest in the future of the business with infrastructure, marketing,

etc.

2. All the major publishers tell us that Amazon’s $9.99 price for new releases is eroding

the value perception of their products in customer’s minds, and they do not want this

practice to continue for new releases.

3. Apple is proposing to give the cost benefits of a book without raw materials,

distribution, remaindering, cost of capital, bad debt, etc., to the customer, not Apple.

This is why a new release would be priced at $12.99, say, instead of $16.99 or even

higher. Apple doesn’t want to make more than the slim profit margin it makes

distributing music, movies, etc.

4. $9 per new release should represent a gross margin neutral business model for the

publishers. We are not asking them to make any less money. As for the artists, giving

them the same amount of royalty as they make today, leaving the publisher with the

same profits, is as easy as sending them all a letter telling them that you are paying them

a higher percentage for ebooks. They won’t be sad.

5. Analysts estimate that Amazon has sold more than one million Kindles in 18+ months

(Amazon has never said). We will sell more of our new devices than all of the Kindles

ever sold during the first few weeks they are on sale. If you stick with just Amazon, Sony,

etc., you will likely be sitting on the sidelines of the mainstream ebook revolution.

6. Customers will demand an end-to-end solution, meaning an online bookstore that

carries the books, handles the transactions with their credit cards, and delivers the

books seamlessly to their device. So far, there are only two companies who have

demonstrated online stores with significant transaction volume—Apple and Amazon.

Apple’s iTunes Store and App Store have over 120 million customers with credit cards

on file and have downloaded over 12 billion products. This is the type of online assets

that will be required to scale the ebook business into something that matters to the

publishers.

So, yes, getting around $9 per new release is less than the $12.50 or so that Amazon is

currently paying. But the current situation is not sustainable and not a strong

foundation upon which to build an ebook business.

[A portion of this email was redacted by the court.]

Apple is the only other company currently capable of making a serious impact, and we

have 4 of the 6 big publishers signed up already. Once we open things up for the second

tier of publishers, we will have plenty of books to offer. We’d love to have HC among

them.

Thanks for listening.

Steve

Murdoch starts to bend

Murdoch’s reply came the following afternoon, Saturday, January 23. Jobs had made

clear that Apple wouldn’t budge. Murdoch was about to indicate that HarperCollins

would. He proposed two possible compromises, then noted that News Corp. and Apple

were negotiating on a number of fronts. “Is it worth considering in the round, over the

next few months or weeks, whether or not some of these loose ends can be tidied up?”

Murdoch wrote. The iPad announcement was four days away.

Steve,

I think the crux of this is our flexibility to offer product elsewhere at price-points you

don’t like.

If we could offer to you that a certain percentage of releases (>50%) would be available

within your pricing structure (< or = 14.99), does that give you enough comfort?

I think we are worried more about the absolute holdback of product elsewhere, and our

ceding of pricing to Apple, than we are about the actual haggle over what the price will

be.

I haven’t shared this with HC directly—so this is only hypothetical. But if you were

willing to accept that a supplier can exploit other avenues (at prices not disadvantageous

to you), with a guarantee of substantial volume through Apple—maybe I could work

with HC to get to some common ground.

Please let me know.

A different question: we have four areas of discussion (related to our product) between

our teams right now: Books, US Video, Int’l Video, and newspapers. All at different

stages of maturity, these discussions are all centered, for us, around the desire to make

our product widely available, and to make yours and our products more attractive for

our customers. It seems though that we in each one we largely encounter a “take it or

leave it” set of terms, and predictably we’ve so far failed to really strike the kind of

partnerships that could move things forward.

Is it worth considering in the round, over the next few months or weeks, whether or not

some of these loose ends can be tidied up? It’s clear that Apple is already becoming an

attractive platform for so many of our customers—all over the world. As a creative

company at our core, NWS [News Corp.] should be more engaged with Apple, and I

think Apple could be more engaged with NWS, globally, than either of us are today.

Best,

JRM

Jobs goes in for the kill

With Murdoch indicating that HarperCollins was willing to compromise, Jobs pressed

harder. “As I see it, HC has the following choices,” he wrote in a reply to Murdoch the

following morning, Sunday, January 24. Jobs outlined three stark choices. Accept our

terms, he was saying, or good luck with Amazon. “Maybe I’m missing something, but I

don’t see any other alternatives,” Jobs wrote, almost daring Murdoch to spurn Apple.

“Do you?”

James,

Our proposal does set the upper limit for ebook retail pricing based on the hardcover

price of each book. The reason we are doing this is that, with our experience selling a lot

of content online, we simply don’t think the ebook market can be successful with pricing

higher than $12.99 or $14.99. Heck, Amazon is selling these books at $9.99, and who

knows, maybe they are right and we will fail even at $12.99. But we’re willing to try at

the prices we’ve proposed. We are not willing to try at higher prices because we are

pretty sure we’ll all fail.

As I see it, HC has the following choices:

1. Throw in with Apple and see if we can all make a go of this to create a real mainstream

ebooks market at $12.99 and $14.99.

2. Keep going with Amazon at $9.99. You will make a bit more money in the short term,

but in the medium term Amazon will tell you they will be paying you 70% of $9.99. They

have shareholders too.

3. Hold back your books from Amazon. Without a way for customers to buy your ebooks,

they will steal them. This will be the start of piracy and once started there will be no

stopping it. Trust me, I’ve seen this happen with my own eyes.

Maybe I’m missing something, but I don’t see any other alternatives. Do you?

Regards,

Steve

On Tuesday, a day before the iPad announcement, HarperCollins agreed to Apple’s

terms. The publisher’s ebooks were included in the iBookstore unveiled on January 27

along with new tablet, more than 100 million of which have now been sold.